Where Will GoPro Inc. Be 1 Year From Now?

By Leo Sun Markets Fool.com

The past two years were brutal for GoPro (NASDAQ: GPRO) investors. In 2015, GoPro launched low- to mid-range cameras to pursue mainstream customers, but the cheaper devices cannibalized sales of its higher-end ones. It also launched the compact Hero 4 Session as a new "premium" device, but the camera was poorly priced and resulted in big markdowns.

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Image source: GoPro.

In 2016, GoPro claimed that its new Karma drone and Hero 5 cameras would get its growth back on track. Unfortunately, the Karma was delayed from its initial launch in May to the holidays, and the first batch was immediately recalled after defective units dropped out of the sky. The Hero 5, which faces a market full of cheaper clones, also got off to a rough start with a pricing dispute. GoPro then slashed 15% of its workforce and shuttered its entertainment division.

That's why GoPro's revenue is expected to fall 24% forfiscal 2016, compared to16% growth in 2015 and 41% growth in 2013. Its stock, which peaked at $87 in late 2014, is worth about $9 today. The company is no longer profitable, and is relying more on downsizing instead of growth to strengthen its bottom line. But will things get better or worse this year? Let's examine the best- and worst-case scenarios for GoPro to find out.

The best-case scenario for GoPro

Things look bleak for GoPro, but there are a few catalysts on the horizon. Its new cloud-based backup service, GoPro Plus, might stabilize itsrevenue growth with its $5-per-month subscription fees and pivot its business away from hardware.

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GoPro might expand into adjacent markets like dash cams, body cams, and security cameras -- which should be a smooth transition since its main supplier Ambarellaproduces chipsets for all three industries. New accessories, like the $299 handheld stabilizer, could generate additional revenue per user, and the upcoming relaunch ofthe Karma might make the drone the ultimate GoPro accessory.

GoPro could alsofinally launch a stand-alone 360-degree camera to compete more effectively against Samsung'sGear 360 and Ricoh's Theta. Demand for cheap 360-degree cameras could rise this year due to increasing support for those interactive videos on social media and video streaming services.

Samsung's Gear 360. Image source: Samsung.

Finally, GoPro's enterprise value of just over $1 billion, its enterprise-value-to-sales ratio of 0.97, and its clean balance sheet all make the company a lucrative buyout target for bigger tech companies. An acquisition from a larger company could be the absolutely best potential ending to this story.

The worst-case scenario for GoPro

On the other hand, sales of GoPro cameras are decelerating so quickly that add-on servicesmight only appeal to the brand's core user base. Without the ability to convert more mainstream users who use smartphones instead of action cameras, GoPro will stay stuck in its niche market.

Many of GoPro's core users also don't seem thrilled by new devices because the improvements seem minor. The Hero 5 Black hasthe same max resolution and frame rate as the Hero 4 Black, and is powered by the same Ambarella A9 SoC and Sony IMX117 image sensor. The only two new features are voice activation and cloud connectivity -- which might not justify a $400 upgrade.

The Hero Session and GoPro Plus. Image source: GoPro.

GoPro arguably overestimates its own brand value (which it believed could support an entire media business) while underestimating the strength of rivals like DJI Innovations. DJI secured valuable floorspace in prominent retail locations for showcasing its flagship Phantom drones last year, which probably stole the Karma's thunder during its holiday launch. Meanwhile, GoPro's strategy of selling everything as "accessories" for its cameras seemingly prevents it from launching new stand-alone devices like 360-degree cameras, body cams, dash cams, or drones with integrated cameras.

To compete more effectively this year, GoPro must boost its marketing budget -- which it already did with its first scripted TV ad last November. However, combining higher expenses with slowing sales growth could cause it to miss its goal of returning to non-GAAP profitability this year.

So which scenario will happen?

I believe that GoPro will remain in a downtrend this year, due to its sluggish response to competitive threats, poor execution of key product launches, and stubborn strategy of building hardware and software ecosystems around its aging cameras. Unless the company hires new management and changes gears quickly, its sales growth could continue slowing down, with even wider losses ahead.

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Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.